Eric He
Hello everyone. Welcome to our earnings call. In the third quarter, our overall business continue to expand as net revenue grew by nearly 50% year-over-year to almost RMB1.5 billion primarily driven by our traditional music and entertainment business and emerging online dating business, but offset by the softness of our online game segments. As in time, we were able to grow our paying users intend with revenue to RMB2.8 million. What’s more impressive is that in our core online music and entertainment segments, our paying users increased over 65% year-over-year to 1.9 million. On mobile front, revenue contribution from our online music and entertainment business increased to 35% of total revenue as compared to only 9% in the prior year period. Additionally, paying users for mobile increased 239% year-over-year to 1.1 million and mobile ARPU continued its strong growth which further accelerated by 69% to RMB252 this quarter from only RMB149 a year ago. Even though the increased contribution for mobile is lowering our overall ARPU, we firmly believe and are experiencing that this will recover as mobile ARPU continues to grow over the mid and long term. Moreover, we launched two new businesses in third quarter. The first is one-time quick, a highly-interactive live broadcasting concert service that connects celebrities, onsite audience, participants and YY large community of users virtually. This new innovative service leverages highly success business model of our online music and entertainment business and encourage the fans of established singers to become YY users. The other new business [indiscernible] incorporates a new model that enable our users to support their favorite YY singers on our platform as they aim to create original and professional works and attract large fans. In the past few months, it has helped to support many artists to successfully launch hundreds of original works. Although these new business are still in early stage, we are confident that they will bring considerable opportunities for YY going forward. Now, I want to turn to our online dating business. Revenue for online dating continues to grow impressively with 169% year-over-year increase to RMB173 million in the third quarter. This strong growth was driven by a solid paying user growth of over 43% year-over-year. We expect our online dating business to continue its strong growth in the fourth quarter of 2015 but even a large size of its user base, we expect the growth momentum to start to normalize in 2016. As for our online broadcasting business, revenue from via live game broadcasting increased by over 80% year-over-year to RMB82 million in the third quarter 2015 and remains strategically important business for us. We continue to develop and expand this business with top tier events and talents as we aim to further broaden its user base and content offering. Our overall growth was offset by softer than expected performance of our online game segment. Due to intensifying competition, widespread softness in the web gaming market as well as at a postpone release of several new games, we are working hard to revitalize growth for online game by introducing several new games over next several quarters. However, we do not expect these games to contribute to our revenue until 2016, thus anticipate continuing softness in online gaming business for the rest of 2015. As we expected, a shift in our revenue mix and increased competition has led to continuing margin pressure. Additionally, there were several one-time occurrences which adversely affect our performance in the third quarter which I will like to discuss briefly. First, we experienced a one-time loss of RMB37 million in foreign currency exchange in the third quarter due to the depreciation of Chinese Ren when we convert our offshore RMB to U.S. dollars. This was a one-time event as we are now holding all U.S. dollars in our offshore accounts. Next, our share based compensation increase which was mainly driven by our one-time payment of value equivalent of RMB28 million through the management of one of our online education teams. Additionally, due to the departure of the key individuals in the online education business, we incurred impairment charges of RMB110 million as well as adjustment gain of RMB74 million for fair value changes of contingent consideration associated with un-obtained earn out payments. Despite some of the secular headwinds we face and adverse one-time occurrences in the third quarter, we are generally optimistic about the company with our cutting edge proprietary technology, diverse business model, large user base and innovative concepts to expand into a new business. Now, I will turn to our quarterly financial details. Before I get started presenting our financial numbers, I would like to clarify that all financial numbers we are presenting today are in RMB amounts and percentage changes are year-over-year comparisons unless otherwise noted. Net revenue for the third quarter of 2015 increased by 49% to RMB1.49 billion, this increase was primarily driven by increase in revenue from online music and entertainment, as well as online dating. IVAS revenue increased by 50% to RMB1.42 billion which mainly reflected the growing number of paying user across all segments except for online games. Now, let’s look at each of our IVAS business lines. Revenue from online, music and entertainment increased by 60% to RMB854 million in the third quarter of 2015, this increase was driven by an increase of 65% in the numbers of paying users to 1.9 million but partially offset by a 3% decrease in average revenue per user ARPU to RMB439. The year-over-year decrease in ARPU was a result of increased mobile contributions to the total music and entertainment revenues. More importantly, mobile ARPU continues to experience solid growth having grown 69% to RMB252 in the third quarter of 2015 from RMB149 in the corresponding period of 2014. Revenue from online games was RMB169 million in the third quarter of 2015 compared to RMB235 million in the prior year period. This decline was primarily caused by a 31% year-over-year decrease in paying users to 336,000. The number of online games operated by YY as of September 30, 2015 increased to 283 from 183 as of September 30, 2014. Revenue from online dating increased by 169% to 173 million, this increase reflected a year-over-year increase of 43% in a number of paying users to 219,000 and an 88% year-over-year increase in ARPU to our RMB788 in the third quarter of 215. Other IVAS revenue increased by 94% to 222 million in the third quarter of 2015, this mainly include revenue from Huya broadcasting, which increased by 81% to 82 million and revenue from membership subscription fees, which increased by 41% to RMB76 million. Other revenues, mainly including revenue from our online education platform, 100 Education, and online advertising revenues from Duowan.com, increased by 37% to 72 million in the third quarter of 2015. Cost of revenue increased by 88% to 905 million, which was primarily attributable to an increase in a revenue-sharing fees and content costs to 573 million in the third quarter of 2015. The increase in revenue sharing fees in content cost paid to performers, channel owners, and content providers were mainly due to higher level of user engagement and spending driven by promotional activity, as well as an increase in number of new emerging business lines in different categories. In addition, bandwidth cost increased to 147 million in the third quarter of 2015, gross profit increased by 13% to $584 million in third quarter of 2015. Gross margin was 39%, compared to 52% in the prior year period. The decrease in gross margin was mainly attributable to change in our business mix to include new business lines involving user generated contents and higher revenue sharing fees in music and entertainment, as well as increased investment in Huya in broadcasting. Our non-GAAP operating income decreased by 19% to 281 million in third quarter of 2015, which was mainly due to the growth of operating expenses such as increasing share based compensation and goodwill impairments as we discussed earlier. The non-GAAP operating margin fell to 19% from 34% in the prior year period as a result of a decreased non-GAAP operating income. GAAP net income attributable to YY was 156 million in the third quarter of 2015, compared to 286 million in the prior year period. Net margin in third quarters of 2015 was 10%, compared to 29% in the corresponding period 2014. Non-GAAP net income attributable to YY Inc. was 237 million compared to 322 million in the prior year period. Non-GAAP net margin decreased to 16% in the third quarter of 2015 from 32% in the prior year period. Diluted net income per ADS in the third quarter 2015 was $2.75, compared to $4.77 in the prior year period. Non-GAAP diluted net income per ADS was 4.17 compared to 537 in the prior year period. This concludes our prepared remarks. Thank you for joining our call today. I would like to conclude the call now. Thank you. Operator, we would like to conclude the call now.
